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ACME UNITED CORP - Quarter Report: 2009 September (Form 10-Q)

acme_10q93009.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
__________________
 
FORM 10-Q
 
____________________________________
 
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2009
 
OR
 
[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______ to ______
 
__________________
 
Commission file number 001-07698
 
ACME UNITED CORPORATION
(Exact name of registrant as specified in its charter)
__________________
 
CONNECTICUT
06-0236700
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
60 ROUND HILL ROAD,  FAIRFIELD, CONNECTICUT
 
06824
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code:  (203) 254-6060

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]     No  [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes [   ]     No  [   ]

1

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer  [   ]     Accelerated filer  [   ]     Non-accelerated filer  [   ]     Smaller reporting company [X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes [   ]     No  [X]
 
As of November 2, 2009, the registrant had outstanding 3,258,368 shares of its $2.50 par value Common Stock.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2

 

ACME UNITED CORPORATION
 
 
Part I — FINANCIAL INFORMATION   Page
 
Item 1. Financial Statements (Unaudited)
   
    Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008   4
    Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008   6
    Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008   7
    Notes to Condensed Consolidated Financial Statements    8
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   12
  Item 3. Quantitative and Qualitative Disclosure About Market Risk   16
  Item 4T. Controls and Procedures   16
         
Part II — OTHER INFORMATION    
  Item 1.   Legal Proceedings   17
  Item 1A. Risk Factors   17
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    17
  Item 3.   Defaults Upon Senior Securities   17
  Item 4.   Submission of Matters to a Vote of Security Holders    17
  Item 5.   Other Information    17
  Item 6.   Exhibits    18
  Signatures    19
                                                                                   
 
3


 
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(all amounts in thousands)
             
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(unaudited)
   
(Note 1)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 6,599     $ 5,225  
Accounts receivable, less allowance
    11,846       10,564  
Inventories:
               
Finished goods
    16,906       20,825  
Work in process
    106       21  
Raw materials and supplies
    838       923  
      17,850       21,769  
Prepaid expenses and other current assets
    1,207       1,088  
Total current assets
    37,502       38,646  
Property, plant and equipment:
               
Land
    175       167  
Buildings
    2,579       2,966  
Machinery and equipment
    8,116       7,455  
      10,870       10,587  
Less accumulated depreciation
    8,710       8,318  
      2,160       2,269  
Note receivable
    1,905       2,000  
Other assets
    2,504       2,508  
            Total assets
  $ 44,071     $ 45,424  
                 
See notes to condensed consolidated financial statements.
 
 
4

 
ACME UNITED CORPORATION
 
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
 
(all amounts in thousands, except share amounts)
 
         
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(unaudited)
   
(Note 1)
 
LIABILITIES
           
Current liabilities:
           
Accounts payable
  $ 3,305     $ 3,669  
Other accrued liabilities
    4,680       5,158  
Bank debt, due June 30, 2010
    9,324       -  
Total current liabilities
    17,309       8,827  
Bank debt, due June 30, 2010
    -       11,719  
Other
    1,990       1,991  
Total liabilities
    19,299       22,536  
                 
STOCKHOLDERS' EQUITY
               
Common stock, par value $2.50:
               
authorized 8,000,000 shares;
               
issued - 4,313,024 shares in 2009
               
and 4,293,024 shares in 2008,
               
including treasury stock
    10,781       10,733  
Additional paid-in capital
    4,114       3,906  
Retained earnings
    20,098       18,319  
Treasury stock, at cost - 1,054,656 shares
               
     in 2009 and  949,656 shares in 2008
    (9,275 )     (8,407 )
Accumulated other comprehensive income:
               
Translation adjustment
    329       (388 )
Unrecognized pension costs
    (1,275 )     (1,275 )
      (946 )     (1,663 )
Total stockholders’ equity
    24,772       22,888  
Total liabilities and stockholders’ equity
  $ 44,071     $ 45,424  
                 
See notes to condensed consolidated financial statements.
 
5

 
ACME UNITED CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(UNAUDITED)
 
(all amounts in thousands, except share and per share amounts)
 
                         
   
Three Months Ended
 
Nine Months Ended
 
   
September 30
   
September 30
 
   
2009
   
2008
   
2009
   
2008
 
Net sales
  $ 15,269     $ 19,158     $ 45,727     $ 56,135  
Cost of goods sold
    9,771       11,288       28,827       33,361  
                                 
Gross Profit
    5,498       7,870       16,900       22,774  
                                 
Selling, general and administrative expenses
    4,864       5,651       14,166       16,690  
Operating income
    634       2,219       2,734       6,084  
                                 
Non-operating items:
                               
Interest:
                               
Interest expense
    (38 )     (135 )     (124 )     (389 )
Interest income
    31       15       97       83  
Interest expense, net
    (7 )     (120 )     (27 )     (306 )
Other income (expense), net
    461       (138 )     480       23  
Total other income (expense)
    454       (258 )     453       (283 )
Income before income taxes
    1,088       1,961       3,187       5,801  
Income tax expense
    360       610       1,076       1,968  
Net income
  $ 728     $ 1,351     $ 2,111     $ 3,833  
                                 
Basic earnings per share
  $ 0.22     $ 0.38     $ 0.64     $ 1.09  
                                 
Diluted earnings per share
  $ 0.22     $ 0.37     $ 0.63     $ 1.05  
                                 
Weighted average number of common shares outstanding-                                
denominator used for basic per share computations
    3,290       3,515       3,318       3,517  
Weighted average number of dilutive stock options
                         
outstanding
    63       135       45       137  
Denominator used for diluted per share computations
    3,353       3,650       3,363       3,654  
                                 
Dividends declared per share
  $ 0.05     $ 0.04     $ 0.15     $ 0.12  
                                 
See notes to condensed consolidated financial statements.
               

 
6

 

ACME UNITED CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(UNAUDITED)
 
(all amounts in thousands)
 
   
Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
Operating Activities:
           
Net income
  $ 2,111     $ 3,833  
Adjustments to reconcile net income
               
to net cash provided by operating activities:
               
Depreciation
    594       666  
Amortization
    85       81  
Stock compensation expense
    214       220  
Change in estimated cost of environmental remediation
    (460 )        
Changes in operating assets and liabilities:
               
Accounts receivable
    (983 )     (3,444 )
Inventories
    4,275       (1,551 )
Prepaid expenses and other current assets
    (18 )     251  
Accounts payable
    (400 )     (799 )
Other accrued liabilities
    (39 )     857  
Total adjustments
    3,268       (3,719 )
Net cash provided by operating activities
    5,379       114  
                 
Investing Activities:
               
Purchase of property, plant, and equipment
    (443 )     (611 )
Purchase of patents and trademarks
    (81 )     (173 )
        Net cash used by investing activities
    (524 )     (784 )
                 
Financing Activities:
               
Net (repayment) borrowing of bank debt
    (2,395 )     2,760  
Proceeds from issuance of common stock
    44       133  
Distributions to stockholders
    (500 )     (422 )
Purchase of treasury stock
    (868 )     (1,000 )
Net cash (used) provided by financing activities
    (3,719 )     1,471  
                 
Effect of exchange rate changes
    238       (304 )
Net change in cash and cash equivalents
    1,374       497  
                 
Cash and cash equivalents at beginning of period
    5,225       4,988  
                 
Cash and cash equivalents at end of period
  $ 6,599     $ 5,485  
                 
See notes to condensed consolidated financial statements.
               
 
7

 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(UNAUDITED)
 
Note 1 — Basis of Presentation
 
In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows of Acme United Corporation (the “Company”).  These adjustments are of a normal, recurring nature.  However, the financial statements do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Company's Annual Report on Form 10-K. Please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2008 for such disclosures.  The condensed consolidated balance sheet as of December 31, 2008 was derived from the audited consolidated balance sheet as of that date.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.  The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto, included in the Company’s 2008 Annual Report on Form 10-K.
 
The Company has evaluated events and transactions subsequent to September 30, 2009 through November 13, 2009, the date these consolidated financial statements were included in this Form 10-Q and filed with the SEC. The Company has not identified any events that occurred subsequent to September 30, 2009 and through November 13, 2009, that require recognition or disclosure in the consolidated financial statements.
 
Note 2 — Contingencies
 
The Company is involved from time to time in disputes and other litigation in the ordinary course of business and may encounter other contingencies, which may include environmental and other matters.  The Company presently believes that none of these matters, individually or in the aggregate, would be likely to have a material adverse impact on its financial position, results of operations or liquidity, as set forth in these financial statements.

In December 2008, the Company sold property it owned in Bridgeport, Connecticut to B&E Juices, Inc. for $2.5 million.  The property consists of approximately four acres of land and 48,000 sq. feet of warehouse space.  The property was the site of the original Acme United scissor factory which opened in 1887 and was closed in 1996.
 
Under the terms of the sale agreement, and as required by the Connecticut Transfer Act, the Company is responsible to remediate any environmental contamination on the property. During 2008, the Company hired an independent environmental consulting firm to conduct environmental studies in order to identify the extent of the environmental contamination on the property and to develop a remediation plan. As a result of those studies and the estimates prepared by the independent environmental consulting firm, the Company recorded an undiscounted liability of approximately $1.8 million related to the remediation of the property. This accrual includes the costs of required investigation, remedial activities, and post-remediation operating and maintenance.

Remediation work on the project began in the third quarter of 2009 and a major portion of the work has been completed. The Company expects to have significantly all of the remediation work completed by year end. As of September 30, 2009, the Company paid approximately $311,000 for work related to the remediation and has approximately $953,000 remaining in its accrual for environmental remediation, of which approximately $550,000 was classified as a current liability. The Company expects to pay approximately $500,000 in the fourth quarter for remediation work on the site.

In addition to the remediation work, the Company, with the assistance of its independent environmental consulting firm, must continue to monitor contaminant levels on the property to ensure they comply with set governmental standards. The Company expects that the monitoring period could last a minimum of three years from the completion of the remediation work.

In connection with the remediation work completed in the third quarter of 2009, the environmental study was updated by the independent environmental consulting firm. The results of this study produced a remedial action plan with a more narrow scope which allowed the Company, along with its environmental consulting firm, to refine the original project plan resulting in a new estimate of costs to complete the project. The change in estimated costs resulted in a benefit of approximately $460,000 which the Company recorded as other income during the three months ended September 30, 2009.
8


The change in the accrual for environmental remediation for the nine months ended September 30, 2009 follows (in thousands):


Balance at
December 31, 2008
Payments
Change in
Estimate
Balance at
September 30, 2009
       
$  1,724
$  (311)
$  (460)
$  953
       
Note 3 — Pension

Components of net periodic pension cost are as follows:
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Components of net periodic benefit cost:
                       
Interest cost
  $ 43,750     $ 41,611     $ 131,250     $ 131,611  
Service cost
    3,750       3,750       11,250       18,750  
Expected return on plan assets
    (37,500 )     (39,428 )     (112,500 )     (151,928 )
Amortization of prior service costs
    2,250       1,959       6,750       6,459  
Amortization of actuarial loss
    18,750       15,983       56,250       53,483  
    $ 31,000     $ 23,875     $ 93,000     $ 58,375  
                                 
The Company’s funding policy with respect to its qualified plan is to contribute at least the minimum amount required by applicable laws and regulations. In 2009, the Company is required to contribute approximately $120,000, of which the Company has contributed approximately $108,000 through September 30, 2009 and expects to make contributions to the plan as required during the remainder of the year.

Note 4 —Debt and Shareholders Equity
 
The Company’s revolving loan agreement, as amended, provides for borrowings up to $20 million, with all principal amounts outstanding thereunder required to be repaid in a single amount on June 30, 2010. In addition, the Company’s revolving loan agreement requires monthly interest payments.  As of September 30, 2009 and December 31, 2008, the Company had outstanding borrowings of $9,324,000 and $11,719,000, respectively, under the revolving loan agreement.  Based on the scheduled payment date for the principal, the Company has classified all borrowings under the revolving loan agreement as of September 30, 2009 as a current liability. For additional details regarding the bank debt please Item 3 -  Liquidity and Capital Resources.

During the first nine months of 2009, the Company issued 20,000 shares of common stock upon the exercise of outstanding stock options and received total proceeds of $43,775.  During the same period, the Company also repurchased 105,000 shares of common stock for its treasury.  These shares were purchased at fair market value, with a total cost to the Company of $868,200.
 
9

Note 5— Segment Information

The Company reports financial information based on the organization structure used by management for making operating and investment decisions and for assessing performance. The Company’s reportable business segments consist of (1) United States; (2) Canada and (3) Europe. The activities of the Company’s Asian operating segment are closely linked to those of the U.S. operating segment; accordingly, management reviews the financial results of both segments on a consolidated basis, and the results of the Asian operating segment have been aggregated with the results of the United States operating segment to form one reportable segment called the “United States operating segment”. Each reportable segment derives its revenue from the sales of cutting devices, measuring instruments and safety products for school, office, home and industrial use.
 
The chief operating decision maker evaluates the performance of each operating segment based on segment revenues and operating income. Segment amounts are presented after converting to U.S. dollars and consolidating eliminations.
 
Financial data by segment:
 
(in thousands)
                         
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Sales to external customers:                        
United States
  $ 11,145     $ 15,117     $ 34,520     $ 44,053  
Canada
    1,770       1,906       5,680       6,592  
Europe
    2,354       2,135       5,527       5,490  
Consolidated
  $ 15,269     $ 19,158     $ 45,727     $ 56,135  
                                 
Operating income (loss):
                               
United States
  $ 593     $ 2,107     $ 2,833     $ 5,741  
Canada
    80       183       325       762  
Europe
    (39 )     (71 )     (424 )     (419 )
Consolidated
  $ 634     $ 2,219     $ 2,734     $ 6,084  
                                 
 Interest expense, net
    (7 )     120       (27 )     306  
 Other income (expense), net
    461       (138 )     480       23  
 Consolidated income before taxes
  $ 1,103     $ 1,961     $ 3,242     $ 5,801  
                                 

Assets by segment:
         
   
September 30,
   
December 31,
   
   
2009
   
2008
   
United States
  $ 32,785     $ 33,719    
Canada
    5,639       5,890    
Europe
    5,647       5,815    
Consolidated
  $ 44,071     $ 45,424    

 
10

 
Note 6 – Stock Based Compensation
 
The Company recognizes share-based compensation at fair value of the equity instrument on the grant date. Compensation expense is recognized over the required service period. Share-based compensation expense was $67,618 and $53,606 for the quarters ended September 30, 2009 and September 30, 2008, respectively. Share-based compensation expense was $214,006 and $219,869 for the nine months ended September 30, 2009 and September 30, 2008, respectively. The Company did not issue options during the three months ended September 30, 2009.  During the nine months ended September 30, 2009, the Company issued 151,000 options with a weighted average fair value of $2.34 per share. During the three and nine months ended September 30, 2008, the Company issued 68,000 and 80,500 options with a weighted average fair value of $3.86 and $3.62 per share, respectively. The assumptions used to value option grants for the three and nine months ended September 30, 2009 and September 30, 2008 are as follows:
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
2009
 
2008
   
2009
   
2008
 
Expected life in years
NA
    5       5       5  
Interest rate
NA
    3.30%       1.82% - 2.95%       2.95% - 3.30%  
Volatility
NA
    0.29       0.384 – 0.386       0.29 - 0.31  
Dividend yield
NA
    1.2%       2.5%       1.2%  


As of September 30, 2009, there was a total of $596,431 of unrecognized compensation cost related to non-vested share –based payments granted to the Company’s employees.  The remaining unamortized expense is expected to be recognized over a weighted average period of approximately three years.

Note 7 – Comprehensive Income

Comprehensive income for the three and nine months ended September 30, 2009 and September 30, 2008 consisted of the following:
 
(in thousands)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net income
  $ 728     $ 1,351     $ 2,111     $ 3,833  
Other comprehensive income / (loss)  -
                               
Foreign currency translation
    530       (532 )     717       (548 )
Comprehensive income
  $ 1,258     $ 819     $ 2,829     $ 3,285  

Note 8 – Fair Value Measurements

The carrying value of bank debt is a reasonable estimate of fair value because of its short term nature. The carrying value of the Company’s note receivable approximates fair value. Fair value was determined using a discounted cash flow analysis.

 
11

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Item 2.  – Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Information

The Company may from time to time make written or oral “forward-looking statements” including statements contained in this report and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements of the Company’s plans, objectives, expectations, estimates and intentions, which are subject to change based on various important factors (some of which are beyond the Company’s control). The following factors, in addition to others not listed, could cause the Company’s actual results to differ materially from those expressed in forward looking statements: the strength of the domestic and local economies in which the Company conducts operations, the impact of current uncertainties in global economic conditions and the ongoing financial crisis affecting the domestic and foreign banking systems and financial markets, including the impact on the Company’s supplier and customers, currency fluctuations, the continued availability of credit on terms satisfactory to the Company, changes in client needs and consumer spending habits, the impact of competition and technological change on the Company, and the Company’s ability to manage its growth effectively, including its ability to successfully integrate any business which it might acquire. A more detailed discussion of risk factors is set forth in Item 1A, “Risk Factors”, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.  All forward-looking statements in this report are based upon information available to the Company on the date of this report.  The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.

Critical Accounting Policies
 
There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.


Results of Operations
 
Net sales
 
Consolidated net sales for the three months ended September 30, 2009 were $15,269,000 compared with $19,158,000 in the same period in 2008, a 20% decrease (19% at constant currency). Consolidated net sales for the nine months ended September 30, 2009 were $45,727,000, compared with $56,135,000 for the same period in 2008, a 19% decrease (16% at constant currency). Net sales for the three and nine months ended September 30, 2009 in the U.S. segment decreased 26% and 22%, respectively, compared with the same periods in 2008.  Net sales in Canada for the three and nine months ended September 30, 2009 decreased by 7% and 14%, respectively, in U.S. dollars and approximately 2% in local currency compared with the same periods in 2008. The declines in net sales for the three and nine months in the U.S. and Canadian segments are primarily due to a reduction in customer orders across all of our product lines as a result of the continued economic downturn.  Also contributing to the decline in the U.S. operating segment in the three and nine months ended September 30, 2009 was the fact that a large special new order in the third quarter 2008 of approximately $1.2 million from a major retailer for product for the back to school market did not reoccur this year. European net sales for the three months ended September 30, 2009 increased 10% in U.S. dollars and 16% in local currency. European net sales for the nine months ended September 30, 2009 increased 1% in U.S. dollars but increased 12% in local currency compared with the same periods in 2008.  The increase in net sales in Europe for the three and nine months were primarily due to higher sales of manicure products, which include scissors, clippers and other related items. Also contributing to the increase in the three months ended September 30, 2009 were higher sales of the iPoint pencil sharpener.

Traditionally, the Company’s sales are stronger in the second and third quarters, and weaker in the first and fourth quarters of the fiscal year, due to the seasonal nature of the back-to-school market.
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Gross profit
 
Gross profit for the three months ended September 30, 2009 was $5,498,000 (36.0% of net sales) compared to $7,870,000 (41.0% of net sales) for the same period in 2008.  Gross profit for the nine months ended September 30, 2009 was $16,900,000 (36.9% of net sales) compared to $22,774,000 (40.5% of net sales) in the same period in 2008. The gross margin declines for the three and nine months ended September 30, 2009 were primarily due to fixed costs spread over lower sales, the weaker Canadian dollar, which raised the cost of our products in the Canadian operating segment, and a product mix which consisted of a higher proportion of sales of our lower cost, lower margin products.
 
Selling, general and administrative expenses
 
Selling, general and administrative ("SG&A") expenses for the three months ended September 30, 2009 were $4,864,000 (31.9% of net sales) compared with $5,651,000 (29.5% of net sales) for the same period of 2008, a decrease of $787,000. SG&A expenses for the nine months ended September 30, 2009 were $14,166,000 (31.0% of net sales) compared with $16,690,000 (29.7% of net sales) in the comparable period of 2008, a decrease of $2,524,000. The decrease in SG&A expenses for the three and nine months ended September 30, 2009, compared to the same periods in 2008, was primarily the result of cost cutting initiatives, lower freight and commission costs as a result of lower sales and a lower impact from foreign currency translation as a result of a weaker Euro and Canadian dollar.
 
Operating income
 
Operating income for the three months ended September 30, 2009 was $634,000 compared with $2,219,000 in the same period of 2008. Operating income for the nine months ended September 30, 2009 was $2,734,000 compared to $6,084,000 in the same period of 2008.  Operating income in the U.S. segment decreased by $1,516,000 and $2,909,000 for the three and nine months, respectively, compared to the same periods in 2008. Operating income in the Canadian segment decreased by $103,000 and $437,000 for the three and nine months, respectively, compared to the same periods in 2008.  The decline in operating income for the three and nine months in the U.S. and Canadian segments is principally due to the lower sales and associated gross profits partially offset by lower selling, general and administrative costs. The operating loss in Europe decreased by $32,000 for the three months ended September 30, 2009 compared to the same period in 2008. The operating loss in Europe increased by $5,000 for the nine months ended September 30, 2009 compared to the same period in 2008.
 
Interest expense, net
 
Interest expense, net for the three months ended September 30, 2009 was $7,000, compared with $120,000 for the same period of 2008, a $113,000 decrease.  Interest expense, net for the nine months ended September 30, 2009 was $27,000 as compared to $306,000 for the same period in 2008, a $279,000 decrease. The decrease in interest expense, net for both the three and nine months ended September 30, 2009 was primarily the result of lower interest rate on the Company’s debt outstanding under its revolving loan agreement. The Company also received $29,539 and $89,212 of interest income for the three and nine months ended September 30, 2009, respectively, related to the mortgage on the Bridgeport property.
 
Other income (expense), net
 
Net other income was $461,000 in the three months ended September 30, 2009 as compared to net other expense of $138,000 in the same period of 2008.  Net other income was $480,000 in the first nine months of 2009 compared to $23,000 in the first nine months of 2008.  The increase in other income, net for the three and nine months ended September 30, 2009 was primarily due to the $460,000 benefit recorded for the change in estimated costs associated with the remediation of the Bridgeport property. Refer to Note 2 – Contingencies, for further details related to the Bridgeport property.
 
Income taxes
 
The effective tax rate for each of the three and nine month periods ended September 30, 2009 was 33% and 34% compared to 31% and 34%, respectively, in the same periods of 2008.
 
 
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Financial Condition
 
Liquidity and Capital Resources
 
The Company continues to experience the effects of the ongoing global recession. This economic downturn has softened demand for the Company’s products and caused our customers to reduce their inventory levels which have negatively impacted our sales and earnings. In response to these circumstances, management has cut expenses where possible, including incentive pay, travel, professional service fees and other discretionary spending. The Company has also implemented a freeze on salary increases and hiring employees. Despite the weak economic conditions, management believes it has sufficient access to the credit market. Management has had preliminary negotiations with its current bank and other potential lending institutions regarding the refinancing of its current credit facility.  Based on these negotiations, management expects to complete a refinancing early in 2010. However, given the current economic environment, there can be no assurance that the terms of a new loan agreement will be as favorable as the current agreement.

During the first nine months of 2009, working capital decreased by approximately $9.6 million compared to December 31, 2008, principally due to the reclassification of all bank debt, due June 30, 2010 (approximately $9.3 million) as short-term, compared to long-term at December 31, 2008. Inventory decreased by approximately $3.9 million at September 30, 2009 compared to December 31, 2008. The inventory decline is principally related to the Company managing inventory levels to compensate for lower sales in the trailing twelve months ended September 30, 2009 as compared to the twelve months ended December 31, 2008. Inventory turnover, calculated using a twelve month average inventory balance, decreased to 1.8 at September 30, 2009 from 2.0 at December 31, 2008.

Receivables increased approximately $1.3 million at September 30, 2009 compared to December 31, 2008 primarily as a result of the seasonal nature of the back to school business where sales are typically higher in the second and third quarters as compared to the first and fourth quarters. The average number of days sales outstanding in accounts receivable was 63 days at September 30, 2009 compared to 64 days at December 31, 2008.
 
During the first nine months of 2009, total debt outstanding under the Company’s Modified Loan Agreement, (referred to below) decreased by approximately $2.4 million compared to total debt at December 31, 2008. As of September 30, 2009, $9,324,000 was outstanding and $10,676,000 was available for borrowing under the Modified Loan Agreement.
 
On June 23, 2008, the Company modified its revolving loan agreement (the “Modified Loan Agreement”) with Wachovia Bank. The Modified Loan Agreement amends certain provisions of the original revolving loan agreement.  The amendments include (a) an increase in the maximum borrowing amount from $15 million to $20 million; (b) an extension of the maturity date of the loan from June 30, 2009 to June 30, 2010; (c) a decrease in the interest rate to LIBOR plus 7/8% (from LIBOR plus 1.0%) and (d) modification of certain covenant restrictions.  Funds borrowed under the Modified Loan Agreement are used for working capital, general operating expenses, share repurchases and certain other purposes.
 
As discussed in Note 2, in the three months ended September 30, 2009, the Company recorded a benefit of approximately $460,000 related to a reduction in the estimated costs to complete the remediation and monitoring of the Bridgeport property which was sold to B & E Juices in December 2008. Also during the third quarter of 2009, the Company hired an independent environmental firm and began the remediation work on the property. As of September 30, 2009, the Company paid approximately $310,000 for costs related to the remediation of the Bridgeport property and has approximately $950,000 remaining in its accrual for environmental remediation. The Company expects to pay approximately $500,000 in the fourth quarter for remediation work on the site. The Company will use cash flow from operations or borrowings under its loan agreement to pay for these costs. The Company does not believe that payment of such remediation costs will have a material adverse affect on its ability to implement its business plan. In addition, the buyer of the property has financed the purchase by providing the Company with a $2.0 million mortgage at 6 percent interest. Payments on the mortgage are due monthly and will also help fund the remediation.

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Cash expected to be generated from operating activities, together with funds available under the revolving loan agreement are expected, under current conditions, to be sufficient to finance the Company’s planned operations over the next twelve months.


Recently Issued Accounting Standards

In June 2009, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Codification (ASC) 105, Generally Accepted Accounting Principles, which established the FASB Accounting Standards Codification as the sole source of authoritative generally accepted accounting principles. Pursuant to the provisions of the FASB ASC 105, the Company has updated references to GAAP in its financial statements issued for the period ended September 30, 2009. The adoption of FASB ASC 105 did not impact the Company’s financial position or results of operations.

In April 2009, the FASB issued authoritative guidance requiring publicly traded companies to include certain fair value disclosures related to financial instruments in their interim financial statements.  This guidance, which was incorporated into ASC Topic 825, “Financial Instruments,” was effective for interim periods ending after June 15, 2009.  The adoption did not have a material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued authoritative guidance establishing general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued.  This guidance, which was incorporated into ASC Topic 855, “Subsequent Events” was effective for interim or annual financial periods ending after June 15, 2009, and the adoption did not have any impact on the Company’s Consolidated Financial Statements.



 
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
 
Not applicable.
 
 
Item 4T. Controls and Procedures
 
(a)  Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of September 30, 2009. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

(b)  Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2009, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
 

 
 
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PART II.  OTHER INFORMATION
 
 
Item 1 — Legal Proceedings
 
The Company is involved from time to time in disputes and other litigation in the ordinary course of business.  The Company presently believes that none of these matters, individually or in the aggregate, would be likely to have a material adverse impact on its financial position, results of operations, or liquidity.
 
Item 1A – Risk Factors
 
See Risk Factors set forth in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
 
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds
 

Issuer purchases of equity securities
                   
Period
 
Total Number of
Shares Purchased
   
Average Price Paid
per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number of Shares that may yet be Purchased Under the Programs
 
                         
7/1/09 - 7/31/09
    10,000     $ 8.17       10,000       114,335  
                                 
8/1/09 - 8/31/09
    65,000       8.80       65,000       49,335  
                                 
9/1/09 - 9/30/09
    -       -       -          
                                 
Total
    75,000     $ 8.72       75,000       49,335  
                                 
(1)  
Shares repurchased during the three months ended September 30, 2009 were repurchased under the Company’s repurchase program which was approved by the board of directors and announced on December 16, 2008. That program allows for the repurchase of up to 150,000 shares and does not have an expiration date. There are 49,335 shares available for repurchase under this program. The Company also has 200,000 shares available for repurchase under a plan approved by the board of directors and announced on October 7, 2009.
 
 
Item 3.  —Defaults Upon Senior Securities
 
None.
 
 
Item 4 — Submission of Matters to a Vote of Security Holders
 
None.
 
 
Item 5 — Other Information
 
None.

 
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Item 6 — Exhibits

 
Documents filed as part of this report.
 
Exhibit 31.1 Certification of Walter C. Johnsen pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Exhibit 31.2 Certification of Paul G. Driscoll pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 

 

 

 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

ACME UNITED CORPORATION
 
By /s/  Walter C. Johnsen    
   Walter C. Johnsen    
   Chairman of the Board and    
   Chief Executive Officer    
       
Dated:  November 13, 2009    
       
       
       
       
By  /s/  PAUL G. DRISCOLL    
   Paul G. Driscoll    
   Vice President and    
   Chief Financial Officer    
       
Dated:  November 13, 2009    
       
       
 
 
 
 
 
 
 
 
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